RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.
Finance Minister Arun Jaitley on Tuesday held the central bank responsible for the mountain of bad loans, saying the Reserve Bank looked the other way when banks lent indiscriminately during 2008-14 to keep the economy humming.
As per the Section 7 of the RBI Act, the Central Government is entitled to give directions to the Central Bank after it consults the RBI Governor. The following development surfaces soon after there were reports of a rift between the RBI Governor and the government. During this time, there has been an nearly complete breakdown in communication between the government and the central bank.
"The central bank looked the other way (when) there was indiscriminate lending".
The development comes amidst growing rift between the centre and the central bank after the RBI deputy governor Viral Acharya, in a fiery speech, warned that undermining a central bank's independence could be "potentially catastrophic".
Acharya had three of his fellow deputy governors in the audience and also thanked Governor Patel for his "suggestion to explore this theme for a speech", in a show of unity from an institution typically known for its restraint.
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Government official were very upset by Acharya's comments, which included a reference to problems created in Argentina when its government meddled in central bank affairs, senior sources in the administration said on Monday.
Even thought the controversy around spat between the government and the RBI has been doing rounds for a couple of days now, speculations over RBI governor Urjit Patel's resignations hit the headlines on Wednesday morning.
One report indicates that consultations between the Centre and the RBI have been initiated under Section 7, but that no specific directions have been given yet.
The government has cited a never-used legal provision in trying to resolve disagreements with the central bank, which could lead it to direct the monetary authority to do its bidding if invoked, people with knowledge of the matter said.
The government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest, the Economic Times newspaper reported. However, there was no sign of resignation by Patel at the meeting, officials said.
Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI. Anonymously-sourced media reports indictated also that the finance minister would not go through the step. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.